Albany's Way of Financing Pensions Is Ruled Illegal

By KEVIN SACK,

Published: November 17, 1993

ALBANY, Nov. 16—
Ruling that New York State must pay a price for its past fiscal gimmickry, the state's highest court declared today that Gov. Mario M. Cuomo and the Legislature acted illegally in 1990 by changing the way the state's pension system is financed.

The unanimous ruling by the Court of Appeals leaves the state and many local governments with huge budgetary headaches. Going into a year when it will face its fifth consecutive budget shortfall, New York may now owe as much as $1.5 billion to the pension fund. The state has a $60 billion budget.

Local governments around the state, which use the state's retirement system to provide pensions for their employees, may owe another $1.5 billion. New York City has its own retirement system and is not affected by the ruling.

Fiscal analysts and lobbyists for local government organizations said that the questionable practices adopted by the state in the early 1990's to deal with recessionary budget shortfalls were now coming home to roost.

"The decisions made several years ago to balance hard budgets are coming back to haunt us," said Cynthia B. Green, deputy research director of the Citizens Budget Commission, a fiscal watchdog group financed by businesses. "And it's going to be a heavy lift."

The state has lost other court cases that challenged budgetary maneuvers invented by Mr. Cuomo and the Legislature. Last year, a Federal court struck down the state's decision in 1990 to defer a week's pay to all state employees until they left state service. That measure saved the state $135 million, but the public employee unions forgave the judgment in exchange for concessions in new labor contracts.

Also last year, state courts rejected the state's attempt to take $80 million from the New York State Thruway Authority in 1991, which planned to subsidize the deal by selling bonds without voter approval. Another lawsuit, which is pending in the state courts, challenges the state's sale of Attica Correctional Facility to the Urban Development Corporation and the sale of portions of Interstate 287 to the Thruway Authority.

Officials with the state and with the public employees unions that filed the pension lawsuit said the state probably would not have to repay the entire $1.5 billion in a lump sum. Even before today's ruling, the state comptroller, H. Carl McCall, who is the sole trustee of the $56 billion pension fund, had been negotiating with the unions and the Governor's office to structure a payment schedule that would stretch over years.

"I now have to restore the funds necessary to insure future benefits for all members without disrupting the already precarious budgets of state and local governments," Mr. McCall said in a statement. Challenging Accounting

The union lawsuit challenged a change in pension accounting methods made by the Legislature and Mr. Cuomo in 1990, when they were trying desperately to fill a $2 billion budget gap. The change, which was devised by Mr. Cuomo's budget division, meant that employer contributions to the system had to cover only the current operating costs of the pension system, rather than the estimated cost of paying pensions for all employees in the future. It enabled employers -- the state and local governments -- to reduce their contributions to the pension fund in the short term while increasing them in the long term.

The state's contribution to the pension system dropped from $470 million in 1990 to $3.1 million in 1991, said Steven A. Greenberg, Mr. McCall's press secretary. Both Mr. McCall and his predecessor, Edward V. Regan, opposed the change on behalf of the pension system, which covers 860,000 active members and retirees.

A coalition of state workers' unions, including the Civil Service Employees Association, the Public Employees Federation and Council 82 of the Security and Law Enforcement Employees, filed a lawsuit contending that the change encroached on the comptroller's powers as sole trustee of the pension fund and impaired the fund's security. Fiscal Crisis 'Only Factor'

The court agreed in a 6-to-0 decision written by Judge George Bundy Smith that if the new accounting method was maintained, "reserve monies will not be available for immediate investment, the return on the investment of monies in the existing fund will be significantly decreased and the additional security provided by the reserve monies in the pension funds will be impaired."

Judge Smith wrote that it was "uncontroverted that the only factor the Legislature considered when it chose to alter the funding method was that of the fiscal crisis facing the state."

Joseph McDermott, president of the Civil Service Employees Association, the largest union of state workers, said the ruling "makes it clear once again that the retirement system cannot be used as a political slush fund."

Edward C. Farrell, executive director of the New York Conference of Mayors, said it was unfortunate that cities, towns and villages would have to pay for the state's miscalculation. But he said he was glad that the court had restored the integrity of the pension system.